Should You Buy Apple Before the iPad Goes On Sale?

This article was updated March 9, 2012.

"Apple  (Nasdaq: AAPL  ) will become the most valuable company in the world. Bet on it. In fact, go out and sell all your personal belongings, liquidate your 401(k), and buy Apple stock with every last dollar you own."

That was the intro to an article I wrote on Sept. 12, 2010, on the inevitability that Apple would become the most valuable company in the world; Apple has risen 107% since then and recently did secure its place as the world's most valuable company. While the intro was a bit sensationalistic -- on purpose -- the message of the article was clear: Go and buy Apple. And less than a week later, I followed it up by issuing a buy recommendation. Later, I bought Apple for my real-money portfolio on fool.com. In that buy recommendation I called it "my top conviction selection to outperform the market in 2011."

All this to say, I've been a huge Apple bull the past year and a half, and I'm hardly alone in my opinion. Wall Street has nearly unanimous buy recommendations on the company. But so much changes when a company sees huge gains the way Apple has across the past year. During its torrid 2012 run alone, the company has already notched a 35% gain in just two months.

The $500 billion question has become whether Apple shares have any fuel left in the tank. Today we'll examine not only what the iPad means for Apple ahead of the new iPad launch on March 16, but also whether the company is still a buy.

The incredible iPad mania
It might be stunning to investors who witnessed iPod and iPhone mania, but it's the iPad that has claimed the title of Apple's fastest-selling product in history. As of last quarter, it'd already moved 55 million units, far outpacing other iconic Apple products.

Source: Tim Cook at Goldman Sachs Technology Conference.

The iPad contributes about 20% of Apple's revenue today, second only to the iPhone. It's a central force in pushing Apple into American business, with nearly every Fortune 500 company deploying the iPad in some form. By 2013, Forrester Research estimates that about 17% of all global business and government PC spending will be on iPads. Any way you slice it, the iPad is an essential component of Apple's meteoric rise.

The new iPad will continue Apple's dominance of the tablet space. Features include:

  • Retina Display: Like the iPhone 4 and 4S, the iPad will have a display that significantly reduces any pixilation. Put simply: a much sharper, clearer display.
  • 4G connectivity: So far, Apple has eschewed next-generation LTE capability because the technology was new and basebands from supplier Qualcomm (Nasdaq: QCOM  ) would consume too much power. However, with years of research and improvements to LTE chips, Apple finally committed to LTE and the higher data speeds it provides. The best part? LTE use isn't a battery hog on the new iPad.
  • Hardware: The iPad comes with an upgraded A5X processor and also reportedly doubles the amount of RAM inside.

Critics will point out that competitors already have implemented many of these features, but that doesn't matter. Apple has been soundly trouncing higher-priced tablet offerings based on Google's (Nasdaq: GOOG  ) Android. However, this major hardware upgrade does further push Apple's advantage over where it has proved more vulnerable: the low-end price points in tablets. Having all these features further distinguishes Apple from low-priced competitors such as Amazon.com's (Nasdaq: AMZN  ) Kindle Fire.

Put it all together, and the newest iPad not only offers a larger hardware upgrade than the iPad 2 -- enticing existing iPad users to upgrade -- but it also pushes Apple's premium tablet perception. Not only that, but Apple is now following the pricing strategy it has with phones by selling the older iPad model at a discounted price. Although this approach doesn't fully close the pricing gap with the Kindle Fire, the iPad 2 will continue in production at a reduced $399 (or lower) price point.

I just gotta talk about the iPhone
Although I've focused here on the iPad ahead of its release on March 16, the question of whether to buy Apple veers back toward the iPhone.

It's quite simple: While most consumers pay only $200 to $300 for their iPhones -- which is roughly half the cost of an iPad -- the heavily subsidized nature of the mobile industry means Apple actually collects more revenue on each iPhone sold (roughly $660 per phone) than on iPads ($590). This despite the fact that iPhone costs are generally regarded to be in a range where the average phone has about $200 worth of "guts" inside. Compare that with the iPad, where the iPad 2 was closer to $300 in components in each unit. Because of the economics of the wireless industry, the iPhone sells for more and costs quite a bit less to make.

Secondly, while the iPad is Apple's fastest-growing product ever, that's largely because Apple was very careful about building out the iPhone's carrier partnerships and was less aggressive about its pricing during its first few years on the market. Now that the iPhone has opened up to more carriers and is taking advantage of the global demand for smartphones, its sales have skyrocketed.

Tablets are a key area of growth for Apple and remain a near monopoly for the company, but the smartphone market is just staggering. We're still on target for a billion smartphones shipped in 2015. It wouldn't surprise me if tablets and PCs put together were roughly only about 60% of smartphone shipments in that time. And with the iPhone costing the same as the average PC and more than the average tablet sold, well ... you get the picture.

Enough, already! Is Apple still a buy?
Put it all together and yes, I still think Apple's a buy. It can be nauseating to buy a company at its all-time high, one that's been running up for weeks, and one attaining an unprecedented size for technology companies. However, it's worth noting the majority of times buying Apple in the last decade required buying it near all-time highs while it had seen strong gains across the past year. Wall Street is constantly catching up with the realities of the opportunity in front of Apple.

I outlined in a previous article why I believe Apple is still a buy north of $500, and it really hits on three main opportunities for the company. Combined, I believe these opportunities will push Apple ahead of already lofty expectations across the next two years.

  1. Emerging-market growth: Apple has pushed hard into China, and its efforts are bearing 50-pound fruit. China accounted for 16% of Apple's sales just a few quarters ago. With the iPhone not having launched in China last quarter, its momentum in that country should push Apple to another blowout quarter when it next releases earnings. However, China is just one (very large) component of the emerging-market opportunity. Apple focused on the country first but is now expanding out to markets such as Brazil, Russia, India, and Indonesia. All those markets have relatively large amounts of consumers with enough discretionary cash to buy Apple products and present an added opportunity across the next two years.
  2. Business spending: The iPhone has been on the vanguard of an idea called the "consumerization of IT," but the iPad and Mac are now pulling their weight in businesses as well. Rather than having IT departments dictate what their employees use, they're now opening up. Essentially every major company is testing iPad use across their organization. Business spending growth in Macs and iPads alone could account for 25% of the growth projected for Apple in the next two years.
  3. Apple TV: While Apple unveiled a new Apple TV box Wednesday, the larger opportunity will be its own television set, which is likely to hit in 2013. This is an opportunity to once again leverage the iOS ecosystem and could disrupt several industries in the process.

So there you have it: Three reasons for Apple to keep up its momentum in front of the iPad going on sale next week.

One more idea for the road
One final point I'd like to make is that while I've purchased Apple in the portfolio I manage on fool.com, my greatest winner has actually been one of the components inside Apple products. If you're looking for a way to play Apple, you shouldn't limit yourself to just buying the company. We've prepared a free report named "3 Hidden Winners of the iPhone, iPad, and Android Revolution" which not only details that winner in my portfolio but also two other great ideas that are riding Apple's growth. To get your own copy of the report, just click here now -- it's free!

Eric Bleeker owns shares of no companies listed above. The Motley Fool owns shares of Qualcomm, Google, Amazon.com, and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, and Google and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (16) | Recommend This Article (162)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 03, 2012, at 8:29 PM, punt717 wrote:

    Wrong hire............I think you mean higher as in it could go higher!

  • Report this Comment On March 04, 2012, at 1:21 AM, ConstableOdo wrote:

    I'm glad that I purchased most of my shares back in 2004 and I don't have to concern myself about whether Apple will only go up to $600 a share and not $700 to see any profits. Since there are those that still think Apple will issue a dividend some time this year, then even buying a few shares now will get them some gains. I guess many investors like to play around with stocks like Netflix that has huge price fluctuations by the day hoping they'll catch it on the rise.

  • Report this Comment On March 04, 2012, at 4:20 AM, H3D wrote:

    Apple shareholder buy the rumour and sell the news.

    It is a little late for buying the iPad3 rumour, unless Apple announce something radical beyond any of the rumours.

    Apple is doing just great. Getting over heated doesn't help. It just increases the size of the next correction, and current it needs that correction to get up new steam.

  • Report this Comment On March 04, 2012, at 5:19 AM, mjb190 wrote:

    Nobody has mentioned it, but can you imagine hat would happen if there was a 3,4,5 etc stock split.

    I know it doesn't change the inherent value of the stock. but psychologically people would view it as more affordable.

  • Report this Comment On March 04, 2012, at 5:39 PM, skippy09 wrote:

    Ever since the introduction of the iPhone, there's never been a bad time to buy AAPL. Snooze, you lose. Waiting for dips in this stock is a fool's venture. That's why I'm buying what I can afford and still adding to my position, I don't care how small the lots. My last purchase was 2 shares when I had a thousand bucks laying around my account earning next to zero.

  • Report this Comment On March 04, 2012, at 10:39 PM, TMFNewCow wrote:

    You're just jealous because you're not a Rock God, Bleeks.

    -- Evan

  • Report this Comment On March 05, 2012, at 9:51 AM, TMFRhino wrote:

    Don't make me unleash the MP3's from my seminal high school garage rock band: BLIND SPOT!

    -Eric

  • Report this Comment On March 06, 2012, at 6:18 PM, f4ftrjoc wrote:

    STRONGLY AGREE REGARDING MY DESIRE TO SEE AAPL BE IN A STOCK SPLIT. I OWNED 130 SHARES OF BIDU AT 685 P/S WHEN IT SPLIT 10 TO 1...ALL OF A SUDDEN I OWNED 1300 SHARES AT 68.5...LOOK AT IT TODAY!

    ANY IDEA WHAT MIGHT BE THE "MEAN' NUM-BER OF AAPL SHARES THE AVERAGE IS HOLD-ING?

  • Report this Comment On March 07, 2012, at 12:21 AM, alvin wrote:

    still no moat and overpriced.

  • Report this Comment On March 07, 2012, at 4:10 AM, gilsh wrote:

    The case for Apple should be made upon the companies key statistics. Mainly FP/E and P/E, which look very good for a company at this size and with such gains.

    The company had a wonderful decade, and had been a clear leader with several great products, mainly the iPod, iPhone and the iPad.

    But iPad3, just like iPhone 4Gs, does not sound like a significant improvement. And the gap between Apple and the Competition is getting smaller.

    The company's strategy - being the elite - is no strategy to remain a leader, and is a sure path to losing market share as the competition grows.

    Which raises only one serious question: at what point will the high watermark of the stock price be the last one.

    Everyone expecting Apple to start giving dividends is building towers on air. This is not the character of this company. Berkshire will start giving dividends before Apple will. Buybacks are a possibility, but I suspect that the guys at Apple know what I know - that the markets of the "old" products are getting crowded, and until Apple is able to pick another ace out of its sleeve - maybe in the image of AppleTV in 2013 - the company's business will remain, more or less, as it is now, but with a reducing market share.

    It is important to note that as the smartphone and tablets markets are growing, a reducing market share does not mean a reduction in sales. On the contrary.

    Which leaves one question to be answered, and that question is more about the psychology of investors than the economic rationale of investments: will investors prefer Apple over companies with a greater chance of growth, because of Apple's proven track record and known brand name ?

  • Report this Comment On March 07, 2012, at 11:51 AM, qazey wrote:

    Even if apple loses some market share its not the end of the world for apple. The ipad and iphone are leaders in the 2 fastest growing industries in tech. They are also extremely profitable it is only natural for there to be in increase in competition. Even if market share gets cut in half. Growth will still double 2x this next decade.

  • Report this Comment On March 07, 2012, at 12:49 PM, gdever65 wrote:

    I bought some AAPL at 200, some more at 300 and I felt unsure when I bought some more at 350. Not sure if I can go for 535/share.

  • Report this Comment On March 07, 2012, at 2:38 PM, mikecart1 wrote:

    Apple's days are numbered. I think it will go higher but they will have to produce something equally as groundbreaking as the iPhone or iPad to continue this pace. The iPad is arguably not really groundbreaking at all since it just combines their computer hardware with the software on an iPhone. So basically the iPhone was their last gold mind of success. That was years ago when Steve Jobs was still around inventing. Apple TV looks like a mediocre product that I find very few people will buy. Are people going to suddenly stop paying for cable and instead buy Apple TV? I think not. Apple will maybe hit $600 before it slowly levels off at around $400 +/- $175 for a long time. The only thing that might be attractive for Apple as a stock is if they provide a dividend that exceed 5% annually. Otherwise, this stock is pretty much done - as the company is too.

    "Competition crushes all companies completely" - mikecart1.

  • Report this Comment On March 09, 2012, at 2:02 PM, bfsteck wrote:

    Question: What is a good "stop loss" level on APPL for protection against a major hit or just to protect curent gains if you're in @ around $200?

  • Report this Comment On March 09, 2012, at 2:08 PM, mwong000 wrote:

    A lot of ppl think that new innovative products as Apple's only engine for future growth. What they are missing is that Apple can double or quadruple even w/o awesome new products.

    Apple's market share in China, India and many countries is still small. Consider they just shipped iPhone4S to China last year. The iPhone is a must have status symbol in China. In spite of the huge numbers there already, the percentage penetration is still very, very low. And that's only bc of supply, not demand. There was a newspaper article in HK recently saying that a Chinese couple were caught smuggling over USD$500,000 of iPhones from HK to China where they fetch over double the price. People in HK were paid USD$100 to pose as real buyers so that these black market re-sellers can get more than their allocation of 2 per person. Now that Apple added a second carrier, China Telecom, their sales will double there. And when Apple adds Siri in Chinese, the numbers will go up even more.

    Also consider Argentina. The country will not allow Apple to sell iPhones there bc they want to pressure Apple to have a manufacturing plant there. However, virtually all tourists from Argentina to the USA can be seen playing with an iPhone because anybody who speaks English will buy iPhones here.

    Consider also, that demand for smart phones will grow by 2X by 2015. That's conservative, because it has been growing at a 50% annual rate -- which means 3.3X in by 2015. Even if Apple loses a little of its market share (and it won't, IMHO), that will add even more to it's growth prospects.

    The problem, is not demand. The problem, if u can call it that, is supply. How fast can Apple increase its distribution in other countries? That's where Tim Cook is the Master. And that is why Steven Jobs, known for his ability see things the rest of us mere mortals cannot, picked Tim Cook to be the CEO.

  • Report this Comment On March 11, 2012, at 1:10 AM, gravyluvr wrote:

    I'm still holding... But I can't help seeing an amazing similarity between AAPL today and IBM in 1986. In October '81 IBM was under $13 (adjusted) and as it dominated the PC industry it soared to peak above $42 (adjusted) in August '87. IBM's domination of the PC market started waning as clones started to pick up market share. By Sept '93 it was selling for $10.50 (adjusted). As we know, Big Blue survived and thrived since but imagine if it had not tried to OS/2 Warp its way out of Windows.

    Apple is a very different company, but it's visionary is gone. Today we have Droids instead of clones (very star warsy), and Google is the Windows to Apples IOS and the playing field is Samsung, Motorola, ZTE, HTC, LG (with RIMM acting as the 80s Apple) instead of Compaq, Dell, HP, etc.

    Apple could still soar to $1000 over the next year or two or a paradigm shift will occur and Apple will be passed by its competitors and the golden egg will crack and leave those who fail to diversify crying.

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